Consider an economy composed of three agents: firms, households and government. Representative firm produces a final consumption good (Y) and with capital (K) and labor (ND) according to following production function: Y = z K¹/² N1¹/² -1/2 (1) where z denotes productivity of economy. Capital (K) is predetermined (i.e., its level was determined prior to current period). Firm's problem, therefore, is to choose level of employment that maximizes its economic profit given prevailing real wage (w) in economy. In addition, in economy, households and government demand final consumption good produced by firms. Households receive income derived from their labor and from profits of firms (7), since they own firms. Aggregate demand of households for consumption good is given by following expression: (wh+n) 2 T 2 C = where firms' profits are defined as 7 = (Y-w*N) and I corresponds to Taxes that consumers must pay to Government for latter to finance their consumption G. Assume that there is only one firm and one worker. (2)
Consider an economy composed of three agents: firms, households and government. Representative firm produces a final consumption good (Y) and with capital (K) and labor (ND) according to following production function: Y = z K¹/² N1¹/² -1/2 (1) where z denotes productivity of economy. Capital (K) is predetermined (i.e., its level was determined prior to current period). Firm's problem, therefore, is to choose level of employment that maximizes its economic profit given prevailing real wage (w) in economy. In addition, in economy, households and government demand final consumption good produced by firms. Households receive income derived from their labor and from profits of firms (7), since they own firms. Aggregate demand of households for consumption good is given by following expression: (wh+n) 2 T 2 C = where firms' profits are defined as 7 = (Y-w*N) and I corresponds to Taxes that consumers must pay to Government for latter to finance their consumption G. Assume that there is only one firm and one worker. (2)
Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
14th Edition
ISBN:9781305506381
Author:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Chapter7: Production Economics
Section: Chapter Questions
Problem 3E
Related questions
Question
Refer to attached images. Thanks
Transcribed Image Text:Consider an economy composed of three agents: firms, households and government.
Representative firm produces a final consumption good (Y) and with capital (K) and labor (N₂)
according to following production function:
1/2
Y = z K¹/²N¹/²
(1)
where z denotes productivity of economy. Capital (K) is predetermined (i.e., its level was
determined prior to current period). Firm's problem, therefore, is to choose level of employment
that maximizes its economic profit given prevailing real wage (w) in economy.
In addition, in economy, households and government demand final consumption good produced
by firms. Households receive income derived from their labor and from profits of firms (7), since
they own firms. Aggregate demand of households for consumption good is given by following
expression:
(wh+π)
2
T
2
C =
where firms' profits are defined as 7 = (Y- w*N) and I corresponds to Taxes that consumers
must pay to Government for latter to finance their consumption G. Assume that there is only one
firm and one worker.
(2)
Transcribed Image Text:1.
3.
Solve firms' profit maximization problem. Derive demand for labor, supply of goods and
firm's profits as a function of real wage, parameters and exogenous variables.
Define and explain in detail Competitive Equilibrium situation, making clear relationship
between markets involved, along with differentiating endogenous and exogenous variables.
Consider following values for parameters: Z = 4, K = 7, G = 10, h = 16. Show that value
of competitive equilibrium real wage is w*=2.
Determine competitive equilibrium output, consumption and employment.
5. Without determining numerically, what effect should you expect on w* in case z variable
doubles? Explain in detail intuition behind this (Hint: think of labor market equilibrium).
6. True, False, or Uncertain? A benevolent planner centralizing all decisions in this economy
could achieve a more efficient outcome than what is achieved by market allocation. Refer to
truth of statement, explaining in detail what are differences in equilibrium situations.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 5 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you
Managerial Economics: Applications, Strategies an…
Economics
ISBN:
9781305506381
Author:
James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:
Cengage Learning
Managerial Economics: Applications, Strategies an…
Economics
ISBN:
9781305506381
Author:
James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher:
Cengage Learning
